Economic Crisis

This post grows out of some discussion Freddie and I have participated in over at The Confabulum  re: Conor’s post about potential bank nationalization.

Bank nationalization,were it to occur, would undoubtedly be the result of a failure of all the attempted re-capitalization plans (either from Europe or the TARP in the US,etc.).

I’m convinced that TARPy legislation in whatever guises around the world is bound to fail.

Here is Cassandra on this point (h/t Yves S. of Naked Capitalism):

this is The Big One, we’ve smacked head-first into the boundary of the maximum amount of debt that can be assumed by households, corporates and governments in our economy and be reasonably sustained with the fruits of our labour, and investment. Actually, I would posit that we long-ago pierced any reasonably sustainable threshold, and only through sheer inertia and the fortuitiousness of pulling of rabbits-out-of-hats have we lasted this long. But it is the anchoring of popular belief in faith and absent solvency from days long passed combined with the extrapolation a series of non-extrapolatable macro income streams which could cause any sensible human being believe or have believed that the boundary lay somewhere in front of us and not far behind us.

Cassandra calls this situation “Peak Credit”.  If Cassandra is right–and evidence continues to pile up that she may well be, including China (China!!!) in a recession–then here is her prediction of what transpires:

So IF what we are currently witnessing, commonly termed as The Credit Crunch, is in fact, an expression of what I will term Hubbert’s financial equivalent – “Peak Credit” phenomena , and IF as I posit, we long ago untethered the financial wagon from the real economic train, what does this mean?

Many things, but first and foremost, that we are at a major and painful inflection that will impose a real Kunstleresque austerity upon Americans converging their desires with their means. In a word, this means “revulsion”, a somewhat arcane and long-forgotten term for large-scale write-downs and/or economy-wide elimination of outstanding debt(s).

As further proof, check out this post by Yves from Naked Capitalism [who is indispensable to understanding what is going on] which shows that banks that received TARP money gave out LESS loans.  And this is completely logical once we understand this is not a credit crisis but a solvency one.  (Cassandra’s point as well).

Yves:

But that aside, why should we expect that the TARP would lead to more lending? First, there should be less lending, independent of the economic contraction. We know now that TONS of credit was extended to people who shouldn’t have gotten it at all or should have been granted much less than they got. Those balances NEED to shrink, ideally by paying them down, although a fair bit will be via defaults and writedowns…

Now offsetting that to a fair degree is that a lot of businesses are dragging out payments, which puts financial stress on their vendors. They could really use more financing now, if you assume that the business itself is viable and the customers won’t default on their obligations. But banks aren’t set up to do that level of credit investigation. If you fit in the right box on their grid, great, otherwise, you are toast.

The whole depressionary enchilada in other words is baked in the oven of knowledge about the amount of debt loads institutions hold–who holds the debt, what levels, who is trustworthy, who is not, etc.

Any money a bank gets from the government is going to be hoarded to protect their financial backsides because they don’t know how much debt they are actually holding.  But they can guess that’s a helluva lot more than they think it is and they better hold whatever small change they get from the taxpayer in that likely scenario.  Also, they have to realize at this point that a whole bunch of these debts are just going to be written off, so if there is a mass financial Jubilee, (tip o’ the Bowler hat to John Robb) they have some cash on the far side of the leveling.

Nicholas Nasim Taleb says the banks will become public utility companies (like electric, gas, and water).  Whether those are fully nationalized or rather public-sponsored or publicly sanctioned private monopolies which are massively regulated, seems the inevitable outcome of all this debt unloading. At best it means that the injection of liquidity into the banks has only staunched total arrest and complete hemorrhaging (i.e. mass runs on banks).  It has not in any sense brought recovery.  There is way too much more debt (“bad blood”) to be leeched out of the global finance body.

But perhaps my brothers in the League will have alternative theories as to how this could play out or would indulge in some discussion of how to prepare for and give a better spin to (as human life) an “austere” age.  If that is in fact to be the case.